SINGAPORE: Foreign exchange reserves in Asia have recorded their biggest six-month decline in years, a testament to policymakers’ determination to defend currencies facing persistent downward pressure from a strong U.S. dollar.
Across the region, reserves fell a total of $372 billion, or 6.2%, in the first half of 2022. It was the largest percentage drop in half a year since the six months to January 2016.
Thailand led the decline with a 10.4% fall to $201.4 billion at end-June, followed by the Philippines, where reserves fell 7.3% over the same period to $100.9 billion.
India and Japan came in at about equal-third, both sliding about 7% - to $529.2 billion and $1.2 trillion, respectively, at end-June.
“Usually, actually, Asian economies aren’t that concerned about having a weaker currency, as most of them are large exporters … but the size of the moves has been pretty large and would have raised concern,” said Alex Holmes, senior economist at Oxford Economics.
“The big added factor is that most countries are now battling decade-high inflation, and that’s a problem that’s compounded by having a weaker currency.”
The Deutsche Bank Currency Volatility Index, which measures expectations for gyrations in foreign exchange, has risen more than 70% this year.
The Reserve Bank of India (RBI) has said it is prepared to draw down forex reserves further to stem any sharp, jerky depreciation of the currency.
ANZ economist and foreign exchange strategist Dhiraj Nim expects the RBI to not run down its reserves too quickly or aggressively.
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“We don’t exactly know what the peak Fed funds rate will be at the end of this cycle … so I think that uncertainty means that the RBI will still have to be cautious about how to manage their FX reserve intervention policy.”
Likewise, only a more definitive tone from the Fed on peaking rates could provide other currencies in the region with some respite, and reduce the need for more significant reserve drawdowns.
“A deeper corrective pullback in the dollar is probably key to provide relief to the pressure valve,” said Christopher Wong, senior FX strategist at Maybank.
In general, Asia’s fundamentals have vastly improved since the taper tantrum of mid-2013 and the 1997 Asian financial crisis, giving policymakers some headroom to continue whittling down their reserves. But economies such as India, Thailand and the Philippines, which are running current account deficits, may prove to be more vulnerable.
Foreign investment inflows into Asia were not quite enough to cover trade deficit gaps, said Galvin Chia, emerging markets strategist at NatWest Markets.
“But in each of these cases, there isn’t quite enough of these vulnerabilities, like the gap between the foreign financing and the trade deficit, … to suggest some sort of blow up risk.”
The last time reserves for all of Asia fell more strongly in half a year, in the six months beginning August 1, 2015, Beijing spent heavily to stabilise its currency after a surprise devaluation.
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